Franco-Nevada (NYSE:FNV) grew its gold equivalent sales as well as revenues in Q1. However, the operating cash flow and net income declined. What is important, after the end of Q1, in April, Franco-Nevada made a big investment in iron ore assets operated by Vale (VALE).
Franco-Nevada's gold equivalent sales increased to 149,575 toz. It is 1.4% more than in Q4 and 10.8% more than in Q1 2020. Actually, the volume of gold equivalent sales was the second-highest in more than 3 years. The increased sales volumes are attributable especially to the Antamina mine, Cobre Panama mine, and Hemlo mine. In 2021, Franco-Nevada expects gold equivalent sales of 580,000-615,000 toz. This estimate includes also the newly acquired assets.
The average realized gold price amounted to $1,794/toz in Q1, which is 4.2% less than in Q4. On the other hand, the silver price grew by 7.7%, the platinum price grew by 31%, and the palladium price grew by 9.6%. The oil and natural gas prices improved too. As a result, Franco-Nevada's revenues increased by 1.7%, to $308.9 million. It means a new record high. The dominant source of revenues was gold, which was responsible for 61.5%.
Approximately 15.4% was attributable to silver, 6.3% to platinum group metals, and 2.1% to other mining assets. 14.6% of revenues were generated by energy assets, which is a major improvement compared to 9.1% in Q4. In the near future, the share of "other mining assets" should increase, due to the revenues generated by the newly acquired Vale participating debentures.
The operating cash flow decreased by 8.9%, however, it reached the second-highest level in more than three years. In comparison to the same period of last year, the operating cash flow grew by 14.9%. The net income remained relatively stable, at $171.5 million. It is 2.9% less than in Q4. The EPS declined to $0.9. Also the Q1 adjusted net income of $160.9 million was in line with the adjusted net income of $163 million recorded in Q4.
Franco-Nevada's cash position grew to $538.5 million in Q1. At the same time, the company remained debt-free. Therefore, the net debt equaled -$538.5 million as of March 31. However, in April, Franco-Nevada financed the $518 million acquisition of participating debentures via a combination of cash on hand and credit facility. Therefore, it isn't debt-free anymore. And it is possible that further money will be drawn from the credit facility soon, as the MD&A states:
Our primary focus is on adding further precious metal assets to the portfolio.
Although Franco-Nevada's price-to-earnings ratio declined notably, its current value of 47.04 is still high. Also the price-to-operating cash flow ratio of 33.76 and price-to-revenues ratio of 25.89 is high. Franco-Nevada is the leader of the precious metals royalty and streaming industry, however, it is questionable whether this fact alone justifies such a generous valuation. Especially given that Franco-Nevada has quite an unimpressive growth profile. The company expects that the attributable gold equivalent production will increase from 580,000-615,000 toz this year to 630,000-660,000 toz in 2025. It means only an approximately 10% growth over a 5-year period.
The most important news arrived only after the end of Q1. On April 19, Franco-Nevada announced the acquisition of 4.7% of Vale’s (VALE) outstanding Participating Debentures from the Brazilian Development Bank and the Brazilian government for $538 million. The participating debentures have the character of NSR royalties. Franco will be entitled to receiving 0.264% net sales royalty on 100% of iron ore sales from the Northern System, approximately 70% of iron ore sales from the South-eastern System, and 0.367% net sales royalty from some copper and gold assets.
The debentures should generate approximately 25,000-35,000 toz of gold equivalent per year. The royalty payments will be made always on March 31 and September 30, for the previous half-year. Franco-Nevada acquired exposure to world-class long-life iron ore assets. However, the iron ore prices are very cyclical, and they are at their highest levels in 10 years right now. Therefore, it is possible to speculate, whether the paid price wasn't too high.
In the shadow of this big deal remains Franco's acquisition of a 1.2% NSR royalty on Roxgold's (OTCQX:ROGFF) Seguela gold project. Franco paid $15.2 million to acquire this royalty. According to the PEA, after it is completed, Seguela should be producing 103,000 toz gold per year, over 8-year mine life.
Franco-Nevada has also decided to increase the dividend payments. The quarterly dividend was increased from $0.26 to $0.3. It means that after annualizing, the dividend yield equals 0.82%.
Franco-Nevada's share price declined from the August highs around $166 to the March lows around $105. However, a steep recovery that elevated the share price back over the $140 level followed. Franco-Nevada's shares are in a strong bull trend right now. The RSI is in the overbought levels and the share price is significantly above the 50-day moving average. Also the gap between the 10-day and 50-day moving average is notable. This all indicates that a price correction would be healthy.
On the other hand, the gold price just returned above the $1,800/toz level and seems to be primed for further growth. It should help to push also Franco-Nevada higher. The next resistance should be encountered in the $152-153 area. If it is broken, the way to the August highs in the $166 region should be clear.
What I like about Franco-Nevada's Q1:
- The gold equivalent sales increased.
- The energy assets did much better compared to the previous quarters.
- The revenues reached new record highs.
- The acquisition of Vale's Participating Debentures looks promising. Although the acquisition wasn't cheap, Franco-Nevada acquired exposure to world-class long-life assets.
What I don't like about Franco-Nevada's Q1:
- The operating cash flow declined quite notably.
- Although the dividend was increased, the dividend yield is very low, only 0.82%.